INSTITUTIONAL COMMITMENT AND SOVEREIGN BORROWING IN AFRICA

Forbes magazine of July 4, 1994 reports the need for investors to “watch central banks closely in order to avoid the carnage of stock markets.” Why should lenders care about central banks? Previous studies have given account of the importance of central banks to the economy. Inflation control and price stability are at the core of these functions. Other arguments posit that central banks can be more effective when they are given independence to perform these duties. Due to the importance of central banks, it has also been argued that they are capable of signaling creditworthiness. In other words, lenders pay attention to them because independent central banks signal monetary policy discipline and also fill information gap for investors. However, the argument of creditworthiness in relation to central banks is under discussed. I extend this argument by examining the implication of central banks’ creditworthiness for diverse lenders in African debt landscape. I argue that different credit sources have different loan conditions and even when central bank independence heightens the creditworthiness of borrowers, its effect will vary across credit types. Analyzing a new dataset on “Who lends to Africa” between 2000-2020 for 43 African countries, I find that effect of creditworthiness varies across different type of lenders. While de jure CBI should lead to access to multilateral credit, I do not find similar evidence for bilateral credits and sovereign bond